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LONDON (Alliance News) - Moody's Investors Service on Wednesday dropped its GlaxoSmithKline PLC outlook to Negative from Stable after the pharma firm announced its USD5.1 billion acquisition of Tesaro Inc.
In addition, Moody's affirmed GSK's A2 long-term and Prime-1 A2 ratings on the basis that the company has a "large scale and diversified portfolio" and decision not to raise dividend payments until dividend cover reaches 1.3 to 1.5 times.
Moody's also said that its A2 rating is based on limited patent expiration exposure. This excludes GSK's asthma and chronic obstructive pulmonary disorder drug Advair, for which Hikma Pharmaceuticals PLC and Vectura Group PLC have already announced their intention to produce a generic.
The outlook change is based on the Tesaro acquisition. GSK will pay USD75 per share for Tesaro, a US pharmaceuticals company with an oncology focus, and will also assume Tesaro's net debt.
Moody's predicts that GSK's deleveraging will be slower than expected as a result of this.
"Tesaro is currently running with an operating loss and GSK has said it expects the acquisition to be earnings accretive to its earnings per shares from 2022," Moody's said.
Moody's said that given this, the Tesaro acquisition will both increase GSK's debt and put pressure on GSK's cash flows and earnings before interest, taxation, depreciation, and amortization over the next three years.
As such, a leverage above three times is expected to be maintained until 2021 at least. Moody's said this was "stretched for the A2 rating level and, at least in the short term, not in line with the company's prior public commitments toward a strengthening of its credit profile."
Prior to the acquisition announcement, Tesaro had been expecting GSK's leverage to dip below three times by the end of 2019.
Moody's Senior Analyst Knut Slatten said: "We have changed GSK's outlook to negative as the company will deleverage more slowly than expected following the acquisition of Tesaro. While the acquisition allows for a solid strengthening of GSK's oncology franchise, we expect credit metrics to remain weak for a prolonged period of time."
Aside from its financial impact, Moody's said the Tesaro deal "makes sense from a strategic point of view" given that Tesaro already has an oncology product, Zejula, on the market.
Shares in GSK were down 2.8% at 1,469.20 pence on Wednesday.
